Podcast - Why Ecosystems Matter in Early-Stage Investing

Patrick Driscoll: Welcome everyone and thanks for tuning in to "The Innovation Imperative." My name is Patrick Driscoll, and I'm the Director of Client Development for Emerging Companies and Venture Capital at Holland & Knight. At Holland & Knight, we work closely with founders, venture capital firms and investors navigating the full life cycle of innovation from company formation and early fundraising through growth, scaling and ultimately that exit. A big part of our work sits at the intersection of law, capital, and strategy: helping innovators and investors think clearly about how they build, fund and protect durable businesses. "The Innovation Imperative" is really about that journey. Each episode, we sit down with founders, investors and operators who are shaping the innovation economy, often behind the scenes, to unpack the real stories, lessons learned and inflection points that don't always show up in the pitch decks or the press releases. We focus on venture capital, early-stage companies and the decisions that matter most when the stakes are high.

Today's conversation is one that I'm pretty excited about. Joining me first is my colleague Chauncey Lane, a partner at Holland & Knight based in Dallas. Chauncey works closely with emerging companies, funds and investors on complex legal and strategic issues, particularly as companies and platforms scale. He brings a thoughtful, practical perspective to how founders and investors navigate growth, risk and long-term value creation, and he'll be helping guide today's discussion. We're also thrilled to be joined by our special guest, Trey Bowles. Trey is the founder of Park Cities Angel Network (PCAN), co-founder and managing partner of 1845 Venture Studio, founder and managing director of Bowles Investment Group and fund manager of the SMU (Southern Methodist University) Impact Hub. We love a multi-hyphenate here. He has a unique vantage point across angel investing, venture creation and impact-focused capital. And he's worked closely with founders at the earliest and most formative stages of company building. With that, Chauncey, Trey, thanks for joining us. Let's dive right in.

Chauncey Lane: Thanks, Patrick, I really appreciate that. Trey, very excited to be here having this conversation with you today. When I think of building ecosystems, I can't think of a better person to have this kind of conversation with, as you've just been so phenomenal over the course of your entire experience of building very transformative ecosystems, so really excited to have this conversation with you today. Patrick did a great job of setting up your background, but I mean, he was just scratching the surface. Give us a little bit more about your background and what brings you to this moment with the Park Cities Angel Network.

Trey Bowles: Well, first of all, thanks for having me, guys. Glad to be here. Excited to be a partner with Holland & Knight and excited to kind of talk about some of these topics that are clearly near and dear to my heart and I've spent a good percentage of my career working on. I'll separate my career into three stages. The first stage was sort of builder/entrepreneur. I was in college when I started building companies, had the opportunity to travel across the country and build a bunch of different companies in a bunch of different areas. Ended up having a couple of exits at that time, both in the music media space and in the technology space. I spent the next decade really working on ecosystem building, specifically focusing primarily in North Texas and Texas, but also across the country. I built a number of nonprofit organizations to help support entrepreneurs as they start build and grow their businesses. Included in that was an entrepreneurship department at a private institution here in Dallas called SMU.

And then I'm branching into my next phase of career, which was where I didn't turn investor, but I added investor to my title. And so I spent three years at Techstars being a managing director of programs in Fort Worth, Texas, and ran our virtual anywhere program. And now I'm doing work both at 1845 Ventures Studio and Park Cities Angel Network. I'd actually been in the angel networking space for a while now because I am co-chair of the North Texas Angel Network, another angel network here, where we brought that organization inside of one of my nonprofits and helped rebuild it and get it back to where it's going today.

Chauncey Lane: Trey, what experience has most shaped how you think about founders and capital allocation?

Trey Bowles: Well, I think most of my experiences were shaped by me and by what I went through. I didn't have a bunch of mentors that I got to work for growing up. I started my first company or joined my first company when I was still a senior in college. Built a company that was just right time, right place, fastest growing company in the history of the internet in 2001, and I literally didn't have any idea what I was doing. I had to build a sales team, so I went and bought a book. I had to build an international business development strategy, I went and bought a book. And so I just learned by kind of jumping in the deep end and figuring it out from there. And so a lot of my experiences in entrepreneurship I learned by doing, by making mistakes and by learning from those mistakes and trying not to make the same mistakes again. From a capital allocation perspective, I learned by trying to raise capital for my different businesses. And so one of the things I learned early is that no two deals are the same and that no matter what you read in a book or learn, there's always nuances to what is important to an individual investor. And so I've sort of put together my overall approach to investing and building companies over the past couple of decades based primarily on my experience and any opportunity I had to learn from people that were in similar places as me, be it ahead of me, beside me or even behind me.

Chauncey Lane: Let's dive into the Park Cities Angel Network. What is the Park Cities Angel Network, and what makes it unique? Across the state of Texas, even nationally, there are a number of angel networks out there. What makes the Park Cities Angel Network unique as part of this ecosystem?

Trey Bowles: The importance of angel networks and angels in general for early-stage growth and funding is so important. They have the ability to make their own decisions in terms of investing and what they choose to get involved with. They can get involved both strategically, leveraging their networks, their experiences, their checkbooks and things like that. I think when we started the Park Cities Angel Network – there's several angel networks across the North Texas region right now, we have, as I mentioned, the North Texas Angel Network, we have Cow Town Angel Network, we have Swan Impact Network, we have a slew of other ones that exist – Park Cities Angel Network is really geographically focused, and it's geographically focused in an area of Dallas that are two small towns. They're two small towns in the middle of the city that are not a part of the city. Which makes them unique and exclusive in a different way. But really, I chose to start it there because that's where I live. And that's where my kids go to school and that's where their parents live. And I wanted to find a way to further connect to a really affluent community of people and accredited investors who weren't really spending a ton of time in the early-stage investing space.

And so my thought was, what a great way to connect with them and engage them in this opportunity while educating people as to the value of this asset class and why it could be, not only fun, but really an opportunity to leverage where a lot of us are in our career, which is midway through our career, hopefully, where they're really kind of stuck in the places they are because of the jobs they have, the amount of money they're making. They don't really have the luxury necessarily to start a new business, so what a great way to allow them to connect to businesses and really offer additional value and focus there. There's also an interesting element because of the way that the Park Cities Angel Network connects into the local ISD (Independent School District) that's here. There's some entrepreneurial programming that I built at the high school here, and we've begun to engage with the students and the parents to help increase their focus of teaching the entrepreneurial skill set and then engaging them even as interns in a process here where we're helping them learn how to do due diligence, source companies and grow. So it's a really unique scenario, primarily based on the geography, but also based upon some of the different elements on how we can help engage in our community here.

Chauncey Lane: So you've touched on this a little bit in your answer to the prior question, when we think about how you attract members, how do you keep members engaged? Can you take us a little bit deeper into that? How do you attract high-net-worth individuals to the network? How do you keep them engaged, and how does deal flow and creating a consistent deal flow play a role in that?

Trey Bowles: So our focus is a little bit different. Traditionally, for example, with other angel networks I've been involved with, we're constantly online marketing, promoting, trying to catch somebody's eye and get them interested in joining the angel network. Everything that we do at the Park Cities Angel Network is organic growth. And that's because we want to be very selective in the people that we engage and involve. We want people to be really committed to the idea of participating in an angel network. We're not trying to sell anybody or convince anybody to do it, but rather we really want to make sure that we're bringing in the right groups. And so, the 30-plus angels we have right now all came either through personal relationships that I have, or just slowly but surely meeting people and finding out who else might be involved. And so that's really the way we've built it and will continue to build it, just because it allows us to really make sure that we're focusing on the right audience and growing organically rather than growth. And for this particular angel network, our goal is not about size, it's not about how many people we can get involved, it's really about engaging people that are interested in this inside this geographic community to help write checks.

To source deals, we do a lot of different things. First and foremost, we connect to other angel networks across the country. Most immediately inside of the DFW (Dallas-Fort Worth) area and then across Texas, and then we started to build relationships nationally. We just joined the Angel Capital Association, which is a great place to help connect and get to meet people there. I'm a part of a number of networks that have angel investing syndicates and things like that, but we really start there, going out to that audience and kind of saying, what deals do you have that are available for people to syndicate and get on top of? I've always learned that in building these types of networks in the past, that bringing a $3 million raise that has $2.75 million already raised is a much better deal to bring to an early set of angels than to bring something that has no capital put in it already, because at the very least you know somebody else has done some element of due diligence on this company before you have. And so you're really letting somebody participate early on, participate in the end of a round rather than the beginning of a round. But then we also do traditional standard sourcing: We go on PitchBook, we go on Crunchbase, we go to universities and colleges that exist and look for programs, we scout groups online, we go to the local universities and ask people to help us there. I mean, it's really a little bit of a blitzkrieg in terms of how we're trying to find companies, but we're trying to make sure that we're communicating to them effectively what our thesis is, which at this point is pretty simple, we want post-revenue companies. We do that, again, because so many of the angels that we work with are not early-stage investors, do not work for early-stage companies, and so as you guys may know, sometimes somebody would see a pre-seed company and think, well, that's not a company at all. Well, you and I know that it is, but for an investor, when you don't have any customers, you don't have any revenue, that kind of seems a little bit suspect.

And so that's kind of the way we look at sourcing deals and building that out. And then from there, we really, you know, your last question was how do we support and keep those investors engaged? The answer there is that we just ask them, what's the best way to connect with them? Some angel networks meet monthly. Our angel networks like to meet every two months. They want to have one month where there's some sort of a social engagement opportunity where there may be some education about angel networking and they can connect with the other groups, because again, we're all in the same sort of general community. And then on the opposite months we actually bring in and show them deals. We give them access to the deals at any point that we're looking at. And we use a platform called Dealum, which I think a lot of angel networks tend to use, which allows us to track the deals, move them through a process, communicate to the angels where we are, what due diligence has been done, what we're trying to figure out, but we're trying to engage them and learn from them every week in terms of how can we make this a better fit for their lifestyle, for their access, for their timeframes and timelines and to be able to look at deals and figure out what's the best potential investment for them.

Chauncey Lane: That's a great segue to this next question, Trey. What early assumptions did you have to rethink once the network launched?

Trey Bowles: That's a great question. So this is probably my 37th company to build, and so I'm very comfortable with the chaos that ensues in the beginning of starting a business. So you don't always know what it's going to be, but you always know it's going to be something. And so what we did was we were very intentional in launching it. We went out and held a couple of get-togethers or happy hours with potential members. We had people begin to sign up, but we said to them, we're not going to accept any membership fees or move forward at all until we at least have 30 members. So we had that meeting in May, over the summer we got to 30 members pretty quickly, kicked things into motion and started going. I think what I expected was, we'd have a monthly meeting and everybody would come and be super engaged and want to do that. I did not realize that they would want to meet every couple of months. Which was perfectly fine. I think the other side of it is when you're growing organically, that takes an exceptional amount of time and really takes my time in sitting down and having coffees and lunches and drinks and dinners with people to explain how this is working.

I've been very impressed with how engaged the ISD, the Highland Park ISD, has been in this. We also give all of our companies that we invest in the opportunity to commit or donate 1 percent of their business to the Highland Park Education Foundation, which helps support them as well. So it really creates this vested interest and mutually beneficial scenario where the high school and the ISD is able to help share this with other people as well, because it brings benefit to the students, it brings benefits to the school and it brings a benefit to the education foundation. I also think that because we're marketing for deals, but not marketing for people, I thought more deals would come in quicker. And what we saw in the beginning was as soon as we launched tons of deals came in, and then it kind of dropped off and dropped off. So I think it really speaks to the importance of constant and ongoing social media presence and communicating while also developing these syndication relationships that we've been talking about, which has yielded really good deals. So now that we're sort of six months into this, we're starting to see deals come from our partners, as much, if not more, as deals coming through our own outreach endeavors.

Chauncey Lane: So, and you touched on this a little bit in your answer to the prior question, what was the biggest challenge in the first six to 12 months of creating the network? I appreciate that mining and creating consistent deal flow is always something that you've got to focus on as an angel network. Any other big challenge that you faced in the first six to 12 months?

Trey Bowles: So, one of the things that we wanted to do here was I wanted to, in everything that I build, I'm trying to help give back to people who would come alongside of me in the future, and so I was fortunate to have a young woman who joined our team basically from the get-go, and I kind of went to her and said, you want to learn how to, one, launch an angel network, two, launch a business, and three, get some more experience in due diligence and sourcing, she said, absolutely. And so going through the process of that and building that piece up and helping bring her along – she had a background, at her age, a good background in VC and having had some internships – but really helping her and help create in her the opportunity to connect in and allow her to take an active role in leading, it's been really great. And then as we bring on interns, it's the process of explaining to interns that process of due diligence and sourcing. And I think one of the things that's not easy to convince a young intern of is the opportunity to look at how to evaluate and determine if deals should be funded. The part they don't like as much is the sourcing side. And so I often tell them, look, we can only do due diligence if we have companies in the pipeline. And so teaching them how to do that has been interesting. And really taking the process of building out an early-stage company and developing interest in angels, in sourcing companies and things like that, and translating that to younger people and helping them understand that the things that I'm asking them to do are the exact same things I'm doing at the same time.

So it's just the organizational process of creating workflow and how do you handle a deal and how you look at it and how do you go through the process of sourcing deals and communicating with companies that apply. I will say this, one of my biggest pet peeves about investing in general, I see a lot in venture, is that often times venture capital firms don't do a great job of communicating effectively with a company why they're saying no. I think part of the problem is because they don't want to pass up on a deal that later gets funded by an Andreessen Horowitz or does something really big with Sequoia Capital. And they think, oh, man, I missed out on that opportunity. But what they do in that process, is they do not communicate to the company how the company could come back and be relevant as a potential investment opportunity. And that has always bothered me both as an entrepreneur and as an investor.

So one of the things we commit to do at the Park Cities Angel Network is if we say no to somebody, we will be very prescriptive and specific why. And that oftentimes, you know, it's not something that an entrepreneur wants to hear. But to this point, out of all the deals we've looked at, of all the times we've had to say no, we've never had an entrepreneur come back with anything less than, "Thank you for being honest with me and being clear with me because now I know what I need to do." Oftentimes entrepreneurs, if you tell them what to do, they'll go do it, but when they don't know what to do and they don't know how to figure out how to apply and meet the qualifications and standards for a thesis or a potential funding round, something like this is really, really valuable for them, just to be honest and forthright. And because we're not a venture capital firm that has to create some sort of reputation or space in the market of never missing, never letting a good one go by, we're able to really, really focus on that, not just at the Park Cities Angel Network, but through all the investment mechanisms that I operate and manage.

Chauncey Lane: So Trey, we talked about the origin of the network, we talked about how you've curated the membership and how you source for deals for your members. We talked about some of the challenges you faced. Tell us a little bit about what role strategic partnerships play in the growth and credibility of the networks.

Trey Bowles: Absolutely, so it's important for us to have strategic partnerships for a lot of reasons. One, it's great for deal flow. Two, it is great to get the word out about what we're doing. Three, there's a lot of help that entrepreneurs at an early-stage need. Whether that's legal help, like the great partnership we have with you guys at Holland & Knight, or accounting support, or banking support, or HR support, all the different things that an entrepreneur needs to know. So often what we see is that the entrepreneur knows how to do one or two things really well. They're a subject matter expert in a certain particular area, but other than that, they have no idea what they're doing as it pertains to starting a company. And so oftentimes we see that companies don't fail because people don't have good ideas or because they're not solving problems, they fail because they run out of money or they run out of time. And so by bringing in strategic partners that can be subject matter experts, that can add support and experience and advice and counsel at an early stage is invaluable to these businesses, and, in turn, these entrepreneurs at an early stage, they don't forget the people who helped them in the early stages when they didn't have to, when they can't afford traditional legal bills, or they can't afford the process of hiring and firing people. And so when it comes to a point where they're actually starting to grow, when they launch that business and it's starting to work and excel and grow, they come back to the people that helped them in the beginning, those strategic partners, and help make them effective.

It's also helpful for us, because of a strategic partnership that we have with SMU, it gives us a place to host the events. It gives us a place where somebody would help sponsor the food and the cost associated with that. Because as an angel network, we are a nonprofit organization. We're not trying to make money here. We need to make enough money so that we're able to fund everything that needs to go on in order to operate this, but that's not extremely expensive. Those strategic partners make that helpful and they add invaluable support and service to us as an angel network, the angels inside of our group and then the entrepreneurs that we're trying to fund too.

Chauncey Lane: How does a strong legal infrastructure reduce friction for founders? Tell us a little about some of the mistakes founders make when, understandably, they're trying to manage cash flow, but also with multiple different priorities. What are some of the mistakes you see founders make when they choose to put legal on the back burner and kind of go it alone? What friction does that create for founders?

Trey Bowles: So I think a lot of times it's that they, again, they don't know what they need from a legal perspective early on. We know we need to legally incorporate our business. We know we need to have an operating agreement, bylaws or articles of incorporation. Like we need certain things, but we don't know about IP protections, do we need to trademark something that we're building right now? And a lot of times what happens is if you don't have that guidance early on, and you get a little bit stingy about spending money in the right place, then you substantially increase the amount of money that you're going to pay in the long run. And so what we're doing and what we are looking for from Holland & Knight is helping those entrepreneurs understand, from a prioritization perspective, these are the three or four or five or seven most important things you need to be focusing on month one, month three, month six, month 12, knowing that if they do that well and they help them steward that cash well, when they get to the point where they're raising around – which is obviously a lot more expensive than incorporation or doing a transaction, a merger or acquisition or being acquired – or any of the other elements that come along that pathway, it's pretty important that they get the legal part right, because if they don't, it could cause catastrophic purposes to their business, right? Just think about cap table management. Not knowing and not thinking about how much of your company you should be giving up or you should be selling per round. You get yourself in a position where three or four years down the road, you have no equity in your own company.

And so I think those pieces are really the stewardship that a legal team can offer at this early stage. And really you guys are sort of making an investment in these companies, too, because you're not charging them full rack rate that you charge a corporation. You're coming in and saying, hey, let us be helpful to you now, so that when you grow, we can grow with you. And as I mentioned before, entrepreneurs are exceptionally loyal. Entrepreneurs don't know three law firms. They don't know two accounting companies. They don't know certain people that can do these different things. They need all the help they can get. And so legal is one of the most important elements and typically one that they don't have an expertise in. You can look at your bank account and know whether it's positive or negative, no matter how much experience you have. But understanding what sort of legal protections and focuses you need to have, that's immensely important. Especially when you get into stuff like patents and understanding what's patentable, what's not patentable, when the right time is to patent, how do you spend money doing that? How do you need to allocate budget as you're moving forward, as you are thinking through the amount of money that you need raise and capital uses and sources? What are you doing with that, and how does that relate to your legal trajectory, too? So there's so many pieces where this is super important. What I ask of law firms is just, give us a chance to get started, put us in a place where we're not running out of money before we get going, but know that as we grow, this is the place we're going to do it. We're going to do it with this firm and in this capacity.

Chauncey Lane: Yep, and absolutely fair ask, Trey, forsure. What does success look like for an ecosystem five years out? When you think of an ecosystem like the Park Cities Angel Network, how do you define success five years out?

Trey Bowles: In a perfect world, we're funding deals every month or every other month, right? Like in a perfect world, checks are being cut, entrepreneurs are being built, exits are happening. We create an environment where a), the angel investor knows the deal flow that they're going to get here is superb. For them, the cost of membership isn't the barrier by any means because it's not a lot of money. But specifically thinking around, can this be a resource for them to find good deal flow they can't find other places, that if they invest in it, it grows and succeeds. For the entrepreneurs, we want them to know and have the brand that we treat entrepreneurs well, we're honest with them, the process is safe, it's clear, it's seamless and frictionless as possible. And then we're a group where we're syndicating deals, we're sending deals out to other groups because no angel network usually covers the entire round, and then also we're receiving syndicates from other groups as well and participating there. We want to be a good contributor to the ecosystem, but ultimately our goal is to help our investors and our angels make a great return on the investments they're making in an early-stage space.

Chauncey Lane: What would be the single most important piece of advice you'd give someone listening to this right now, thinking about starting their own ecosystem like the Park Cities Angel Network?

Trey Bowles: So the first thing I would do is go out and talk to 20 other angel networks. Go ask what they did right, what they did wrong, a lot of questions you're asking me today. Like what would you not do? What would you absolutely do? How should I legally structure this? What do I think about nonprofit versus a tax-deductible, 501(c)(6) or (7), like all the questions that you'd need to establish it. Then I'd ask them the same questions we still ask angel networks every week, which is how do you get good deals? How do you add angels to your portfolio and grow, and how do you build an environment that's really positive and supportive of the ecosystem? Make sure that people recognize this is not about the person who organizes this angel network and making money – this is not a good way to make money. This is about giving back to early-stage folks in your community and really helping them provide an environment where good deals get in front of investors and entrepreneurs get funded and hopefully exits happen and people get a return.

Chauncey Lane: Thanks, Trey. I really appreciate you taking the time for a phenomenal discussion. Over to you, Patrick.

Patrick Driscoll: Thanks so much. That was a fantastic conversation. My key takeaways were, I think, founder experience creates better investors. You oftentimes hear this in the VC ecosystem. Investors who understand what it takes to be a founder, they've gone through it, they have that roll up your sleeves, get into the muck type of mentality. The best angel networks are communities, not platforms. I think this seems specifically true for PCAN and what you've built. I like that you spend one-on-one time with a lot of the members, really engaging with them. Ecosystem support matters as much as capital, I think that was double-clicked several times. So rely on folks who know what they're doing. If you're a founder, if you're an angel network creator, ask questions, reach out to those folks, learn from those people that have been successful already. And those are my key takeaways. So I really do appreciate this.

Huge, huge thanks again to Chauncey and to Trey for having this conversation. Trey, for sharing your journey from founder to Techstars managing director to building this Park Cities Angel Network. You're doing a ton in North Texas and at a much broader geographic scale. If you have any questions, you can reach out to myself or Chauncey or go to our website at hklaw.com. And feel free to ping Trey, find him on socials and learn more about PCAN. And with that, I'd like to say thanks again to everyone, and we'll see you next time.